1-19-18: What are supplemental taxes
Question of the week: What are supplemental taxes?
Answer: This is a question many buyers ask, whether first time buyers or someone purchasing for the first time in a long time.
Before we talk about supplemental property taxes we need to review property taxes. To keep this discussion simple, we are only addressing taxes when a home is purchased.
Your property taxes are established when you purchase your home and are based upon the purchase price. The base tax rate in California is 1% of the purchase price. On top of the 1% are additional assessments as established by the voters or elected officials in the county and/or city where the property is located. For instance in Long Beach there are additional taxes assessed for water district, the county for parks, school district and community college district among other assessments.
The rule of thumb for property taxes is the amount is 1.25% of the purchase price of the property. If you purchase a property for $500,000 we estimate your taxes to be $6250 per year.
In California, the fiscal year is July 1st to June 30th. Tax bills are mailed in October with the first half taxes due by December 10th and the second half taxes due by April 10th. With our $500,000 price example, you would need to pay $3,125 in December and $3,125 in April.
If you are purchasing a home and close on the last day of February the escrow company make sure the second half taxes, due by April 10th, are paid as part of the closing. The taxes that will be paid will be those currently due; i.e. the current owner’s tax bill. As well the escrow company will collect from you and reimburse the seller for four months of taxes since you will own the property the final four months of the tax year—March, April, May and June.
On the property you are purchasing for $500,000 that will have property taxes of $6,250 the current owner’s annual taxes at the time of the sale are $3,850 per year. At closing you will be charged $1283.33 to cover the four months between your purchasing the property and the end of the tax year on June 30th.
In October your property tax bill will state that you owe a total of $3,850, half due by December 10th and half by April 10th.
But…your tax basis is supposed to be $6250, why is your tax bill smaller? Because if you purchase your property between January and May the prior owner’s property taxes will continue through the next fiscal year.
You will also receive a supplemental tax bill in the amount of $2400 with half due by December 10th and half by April 10th. The supplemental taxes cover the difference between the amount you were billed based on the prior owner’s tax obligation and your tax obligation based upon the transfer price.
If you are paying your taxes directly this causes little difficulty, you are paying the total amount that is owed, just off of two different bills, the regular tax bill and the supplemental.
If you have your taxes impounded as part of your monthly mortgage payment then it gets a little tricky. Your lender will be collecting every month based upon what your taxes should be, $520.83 per month, and will be prepared to pay $3,250 in December and $3,250 in April. However, in October the lender will receive a tax bill totaling $3,850 with two installments due.
This is where it can, and does, get tricky and one reason I encourage people to avoid having their taxes and insurance impounded and paid by the lender if it is an option. In this scenario, with an impound account, you will have paid your lender $520.83 per month based on what tax obligation will be, and then your lender will pay the taxes owed on the tax bill. The result will be a balance of the excess between what was collected and what was paid. At some point the lender will refund this money to you, as they must by law.
However, the refund will most likely come after you will need to pay your supplemental tax bill totaling $2400. If you are impounded and have paid the full amount to the lender for the taxes why is the lender not paying the supplemental tax bill? They have the money to pay it.
Because the county assessor does not send the supplemental tax bill to your lender, and you are responsible for the payment. Essentially you will end up paying the supplemental amount twice, once to the lender—which eventually gets refunded—and once to the county.
If you have an impound account there is the possibility that your payments will be adjusted a few times over the following year or more. Because the tax bill sent to the lender was significantly less than the amount collected, the lenders automated billing process may reduce the amount owed every month as part of the tax collection and will send you a notice to this effect.
It is very important if you do get this notice that you contact the lender and inform them that you do not want your impound collection to be lowered due to the one-time tax bill that was paid at the prior owner’s tax rate, because if you do then you will be underpaid when the next tax bill is sent and the lender will end up sending you a notice that the account is short and your payment must be increased to account not only for the real tax amount due but the shortage created by them adjusting their collections.
Confusing isn’t it? This happens not infrequently as the lender tries to catch up to the actual taxes owed. So if you get a notice after the first tax bills have been paid by the lender, and you have paid your supplemental taxes that significantly lowers your tax collection for your impound account contact your lender immediately and have them adjust the collection back to the necessary amount.
As with any mortgage or real estate related question or problem you can contact me if you are having an issue regarding the supplemental taxes or impound account I can help walk you through the process and steps to take.
Have a question? Ask me!
Rates for Friday January 19, 2018: Not a lot of economic news this week to move rates, however there was movement up on high-balance and upward pressure on conforming due to the gains in the stock markets. As I write this after noon on Friday the bond markets are off (higher rates) due to uncertainty over the potential shutdown of the Federal government. Now is not the time to float your rate, if you are in position to lock in your rate through your closing period I suggest you lock.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 3.875% Flat
30 year high-balance conforming 4.125% Up 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
I had an interesting childhood moving around (three states and a foreign country through high school), as a result I have what some may consider odd allegiances for sports—basically the Oklahoma Sooners due to my native state and Philadelphia sports as that is where we moved when we left Oklahoma. Being a fan of Philly sports is a history of disappointment most of the time with some seasons of hope.
As a result of my allegiances, I have been somewhat excited through December as first the Sooners had the opportunity to play for the national championship in college football and now the Eagles are in position to go to the Super Bowl for the first time since 2005. The Eagles (or Iggles in local parlance) lost that game to Tom Brady and the Patriots who won their second Super Bowl in a row and third in four years. I may be asking for it, but I am hoping not only that the Eagles beat the Vikings this weekend, but they have a chance to upset the Patriots, prevent them from repeating history by winning their second in a row and third in four years.
I know all of you are with me on this!
Have a great week,
Dennis
Fly Eagles Fly
